Beggars can’t be choosers: Realities of the LNG buyers’ market

It has become clear that for many LNG producers, majors and certain export projects alike, the coming couple of years will be a testing time. Cost cutting, strategy reformulations, impairment charges and takeovers are all on the table as the industry is coming to terms with a glut of LNG that is being pushed onto a global market with a less than stellar appetite for the super-chilled Kool-Aid. For LNG end-users and buyers, such a climate presents an unparalleled opportunity to secure liquefied natural gas at an optimal mix of flexibility and pricing terms. And where these parties still lack LNG import and gas offtake infrastructure, they may just get help from the upstream side in building it as well.

Indeed, LNG sellers – and notably the portfolio players – are keen to catalyse the development of fledging downstream gas markets to help the demand side absorb the significant projected overhang of LNG over (at least) the next five to seven years. Countries like Bangladesh, Myanmar, Philippines, Sri Lanka and Vietnam are set to become LNG importers, even though their aggregate imported volume is unlikely to make a serious dent in said supply overhang any time soon. New LNG markets such as road and rail transport, bunkering and hub-and-spoke driven break-bulk operations are also interesting demand add-ons with serious potential, and slowly but surely these segments are taking off, although significant volume consumption is only likely to materialize post-2025.

It is interesting to observe that some of the countries that recently joined the LNG importers club, like Egypt and Pakistan, have been in such a rush to start importing liquefied natural gas, that FSRU deployment is often the only perceived possible method of implementation. This trend is expected to continue, and companies that bank on having speculative FSRUs or conversion-ready LNG carriers available, would seemingly have a distinct competitive advantage over other solution providers, given that once developing countries have decided they need LNG, imports are ideally expected to start yesterday. Floating solutions may also prove to be the silver bullet for archipelagic regions such as Indonesia, which is keen to implement a country-wide power plant development plan. Indeed, the small-scale Bali LNG import project (consisting of a combination of floating regasification and storage facilities) is exemplary as the concept has been delivered within a very short timeframe. Similar solutions are poised to emerge both in the Pacific and Atlantic Basins.

How do LNG pricing dynamics factor into some of the developments above? Well, several LNG importing countries, such as India and China, have successfully renegotiated their deals, and plenty more parties are considering to push for price reviews. Recent LNG supply tenders issued by aspiring buyers have been known to stipulate a pre-specified oil price slope, leaving only the fixed part of the pricing formula to be contested amongst bidders. And, as Europe is considered the only sink really capable of absorbing significant excess LNG volumes thanks to underutilized existing regasification terminals, both the NBP and TTF may increasingly form the basis for LNG pricing. The glut of LNG will inevitably drive the development of Asian LNG spot price benchmarks and complementary LNG trading hubs (in e.g. Singapore and Shanghai) as well. Another relevant element in the mix is that we see a blurring of the lines between pure LNG buyers and sellers. Japan, as perhaps the most prominent example, is clearly aiming for a reduced intake of LNG intake by 2030, and intents to on-sell already contracted volumes into other markets. This increases competition and puts further pressure on LNG prices.

Nowadays, competitive LNG pricing is therefore expected by buyers, regardless of whether these are highly credit-worthy counterparties, or perhaps counterparties that have seen their capability to pay for commodities crumble in the wake of e.g. a foreign currency crisis. In fact, price may not necessarily any longer be a distinguishing element in a supplier’s proposition. Rather, contractual flexibility is increasingly becoming the differentiator of choice. This extends from allowed upward and downward quantity tolerances to the conditions for diverting LNG cargoes, and from preferred LNG specifications to cargo swapping arrangements. But it also pertains to the pricing mechanisms used. The market is currently even seeing shorter-term LNG supply contracts being closed on the basis of e.g. 80% oil-linked and 20%-gas linked hybrid indexation structures, showcasing that buyers are not entirely convinced that the low oil prices are here to stay, and thus push sellers for flexibility on the price exposure as well.

In a nutshell, there is a wide array of contractual variables that is susceptible to being loosened up as a result of the current buyer’s market, and some of the renegotiated terms could be here to stay as the LNG industry commoditizes further.

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